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I’m prone to enthuse profusely on the wonders of dividend growth. Time after time, I see rising dividend payouts followed by rising share price. As the dividend payout goes, so invariably goes the share price.
With that in mind, does bigger necessarily mean better? That is, the larger the percentage dividend increase, the greater the subsequent share-price appreciation?
For 2013, at least, the answer is “yes.”
I looked at S&P 500 companies that increased their dividend by a double-digit percentage in the first half of 2013, focusing specifically on persistent dividend growers. This is key; I didn’t include dividend growers that cut their dividend within the past five years. (So new dividend growers like Ford and Wells Fargo were excluded.) I then measured their share-price performance against the S&P 500 Index for the second half of 2013.
As I write on the last day of 2013, the S&P 500 Index is up 14.4% over the past six months. In the table below, you’ll find eight S&P 500 stocks that had a minimum 15 percentage-point hike in their dividend in the first half of 2013.
For dividend-growth investors, the results are encouraging. An equal allocation to each stock in the table would have produced 18.1% in share-price appreciation in the second half of 2013, beating the S&P 500 Index by 370 basis points.
Admittedly, my inputs are hardly inclusive, nor are they exhaustive. I focused on dividend growth in large-cap issues. A portfolio of lesser dividend growers may have performed as well. But these are stocks any investor could have easily unearthed. That’s the beauty in the strategy.
That said, in my 25 years of observing correlations between dividends and share-price performance, price generally follows payout. The greater the dividend increase, the greater the subsequent share-price appreciation: double-digit dividend increases frequently lead to greater share-price gains compared to single-digit increases.
Another important takeaway is that subsequent share-price appreciation appears uncorrelated to current yield. Of the stocks in the table, American Express has the lowest yield at 1.0%; Cisco Systems has the highest yield at 3.0%. American Express shares posted a 19.7% gain. Cisco shares, despite the larger dividend increase and higher current yield, posted a loss. Apple, the best performer, sports an above-average yield.
Overall, though, the portfolio supports what I’ve repeatedly seen: a portfolio of large-percentage dividend growers is a portfolio that usually beats the market. This makes sense. Dividends are proven signaling mechanisms. Management is loath to announce a large dividend increase without strong business fundamentals to serve as underlying support.
As the growth-rate in payouts of a portfolio of dividend growers goes, you can be reasonable assured so, too, will go the value of that portfolio.
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